Financial Accounting and Reporting-I: Conceptual Framework and Core IFRS
Core framework
Start with the Conceptual Framework: objective of general purpose financial statements, qualitative characteristics (relevance and faithful representation as fundamental), the elements, and the measurement bases. Then presentation: IAS 1 requires fair presentation, going concern, accrual basis, materiality, consistency and comparatives.
The measurement standards
IAS 2: inventory at the lower of cost and net realisable value, using FIFO or weighted average only. IAS 16: capitalise directly attributable costs, depreciate from the date the asset is available for use, and route a revaluation increase through OCI. IAS 38: research is always expensed; development is capitalised only when all recognition criteria are met. IAS 36: impair when carrying amount exceeds recoverable amount (the higher of fair value less costs of disposal and value in use). IAS 37: recognise a provision only when a present obligation exists, an outflow is probable and the amount can be reliably estimated. IAS 10, IAS 7 and IAS 8 complete the syllabus.
Traps
- Depreciation begins when the asset is available for use, not when it is actually brought into use.
- A revaluation surplus goes to OCI; only the reversal of a previously recognised impairment reversal flows to profit or loss.
- Contingent liabilities are disclosed, not recognised, unless the outflow becomes probable.
- Bank overdrafts are cash equivalents only where they form part of cash management and are repayable on demand.
- A reversal of an inventory write-down is capped at original cost.
Worked example
Machine cost Rs 1,000,000, residual value Rs 100,000, useful life 5 years, straight line. Depreciation = (1,000,000 - 100,000) / 5 = Rs 180,000 per annum. If the asset is revalued upward by Rs 200,000 with 4 years remaining, annual depreciation becomes (1,200,000 - 100,000) / 4 = Rs 275,000, and the Rs 200,000 surplus is credited to OCI.